CHAPTER THREE:

Accounting for Sales Agencies and Branch Operations

Distinction between Sales Agency and Branch When a business enterprise

grows and expands its activities it establishes branches to extend its
activities and market its output.
There are many ways of branching out. A company may form sub entities
of its own. These sub entities may be formal; namely, a separately
controlled corporations known as subsidiaries that can operate as
separate companies, or they may be informal; namely, sales
agencies or branches within a larger company. The concept of
responsibility accounting provides the basis for identifying these entities
as cost or profit centers; accordingly, expense and revenue data are
accumulated for these units of activity in the firm's management. In this
topic, we examine the accounting for informal sub entities within a larger
company
The difference between a sales agency and a branch
most often has to do with the degree of autonomy.
A sales agency, sometimes referred to simply as an
“agency,” usually is not an autonomous operation but
acts on behalf of the home office. The agency may
display and demonstrate sample merchandise, take
orders, and arrange for delivery.
The orders typically are filled by the home office
because a sales agency usually does not stock
inventory. Merchandise selection, advertising,
granting of credit, collection on accounts, and other
aspects of operating the business usually are
conducted by the home office
By contrast, a branch office usually has more autonomy and
provides a greater range of services than a sales agency does,
although the degree differs with the individual company.
A branch typically stocks merchandise, makes sales to
customers, passes on customer credit, collects receivables,
incurs expenses, and performs other functions normally
associated with the operations of a separate business enterprise.
For some companies the branches perform their own credit function,
while for other companies credit is handled by the home office. A
branch may obtain merchandise from the home office, or a portion
may be purchased from outside suppliers. There typically is little
management decision making in a sales agency; decisions are made
at the home office, and the agency conducts routine operations.
The degree of management decision-making in branches usually
is greater than in sales agencies but differs considerably
from company to company
 Characteristics of a Sales Agency
Sales agency is a unit smaller than branch and with very
limited responsibilities agreed upon with the principal.
It is a business unit physically removed from the firm’s main
or home office. Its limited functions include serving
as a base for sales personnel in the field,
processing customer orders, and maintaining limited
inventories of the company’s products.
A sales agency usually does not maintain a financial
accounting system but only keeps sufficient records to
conduct its business. The home office maintains the
accounting system, and transactions of the agency are
recorded by the home office. More specifically a sales
agency often has the following features:
 Carries no inventory of merchandise but only
samples,
 Solicits (takes) customer orders and transmits to
head office, which approves customer credits and
makes shipments directly to customer,
 Accounts receivable of customers are maintained at
head office,
 Collections of accounts receivable are made by
head office,
 Maintains an imprest fund for payments of its
operating expenses
 Characteristics of a Branch

• Branch is an enterprise unit located at some

distance from head office (or home office), with
given responsibility and independence from the
head office.
• The extent of independence and responsibility
varies from company to company and organization
to organization, and country to country. More
specifically a branch often undertakes the
following activities
 Carries inventories of merchandise,
 Obtains stock from head office or purchases portion
of its stock by itself from outside, i.e. Suppliers.,
 Makes sales on cash or credit in its local areas,
 Approves customer credits and makes collection on
its own receivables,
 Has an imprest fund from which it operates, and
accounts to head office to obtain re-imbursement,
 Cash received are usually deposited in bank account
opened in the name of head office,
 May or may not maintain a branch account of its own
and issue own checks, depending on the size of its
operation
A branch does maintain a complete financial accounting system in
most cases.
The maintenance of separate accounting systems for the home
office and each branch often provides better control over operations
and allows top management to assess the performance of individual
branches
Neither sales agencies nor branches are separate legal or
accounting entities; they do not prepare separate external
accounting reports. Whether the accounting system is centralized in
the home office or separate accounting systems are
maintained by individual branches, the external reporting
entity is the company as a whole.
When separate branch accounting records are maintained for
internal purposes, such as responsibility accounting and
performance evaluation, the accounts of the branches and the
home office must be combined in preparing external accounting
reports.
 Distinguishing Sales Agency, Branch, and Division

Sales Agency:
Sales agency is a term applied to a business unit that performs
only a small portion of the functions associated branch. A sales
agency usually carries samples of products but does not have an
inventory of merchandise and usually lesser degree of autonomy.
Branch:
The term Branch is used to describe a business unit located at
some distance from the Home Office. Branches are economic and
accounting entities. However, branches are not legal entity.
Branches may carry merchandise obtained from Home Office,
make sales, approve customers’ credit, and make collections
from its customers.
 Division:

Division is a business segment or a business

enterprise which generally has more autonomy than
a branch.
Division may be as separate company or may not be a
separate company.
If the division is not a separate company, the
accounting procedures are the same as Branch. If the
division is a separate company (subsidiary company),
the financial accounting requires consolidation, which
will be discussed in later topics.
 Differences between Sales Agency, Branch and Division

Characteristics Sales Agency Branch Division

Degree of Autonomy Low Moderate High

Accounting Entity No Yes Yes

Legal Entity No No Possible

Economic Entity No No Possible

 Accounting for Sales Agencies

From an accounting standpoint, the sales agency’s accounts are

carried on the books of the home office.
Transactions are recorded in accounts that identify the particular
sales agency, for example, Sales-Awash Agency; Rent Expense-
Awash Agency.
For some types of transactions, the entries recorded by the home
office are based on source documents generated by the agency.
For example, the home office may record agency transactions
based on sales invoices, payroll records, and documented petty
cash vouchers provided by a sales agency. Other transactions
maybe recorded based on source documents provided by external
parties directly to the home office.
For example, the utility companies providing gas, electricity, water,
and phone service to the agency might bill the home office directly.
An imprest (petty cash) fund is established to provide the agency
with cash used for various small expenses. Since rent, payroll,
utilities, and asset accounting are all handled by the home office,
The home office normally accounts for the assets, revenues, and
expenses of each agency separately. This allows the home
office to maintain control over the assets and provides
information for assessing the performance of each agency.
The cost of goods sold by each agency also must be measured.
When the perpetual inventory system is used, shipments to
customers of the agency are debited to cost of goods sold account and
credited to inventories.
When the periodic inventory system is used, a shipment of goods sold
by an agency may be recorded by a debit to cost of goods sold account
and a credit to shipments to agencies account.
This journal entry is recorded only at the end of an accounting period if
a memorandum record is maintained during the period listing the cost
of goods shipped to fill sales orders received from agencies.
At the end of the period, the shipments to agencies account is offset
against the total of beginning inventories and purchases to measure the
cost of goods available for sale for the home office in its own operations
Example: As an example of home office accounting for
a sales agency, assume that ABC Enterprise,
manufacturer of modular structures and partitions
based in Addis Ababa, establishes a sales agency in
Mettu.
The journal entries to record typical sales agency
transactions for the month of March on the home
office books are shown below. Note that the entries
are recorded in the someway as if the home office
had engaged in the transactions except that the
assets, revenues, and expenses are specifically
designated as relating to the Metu Agency
a. March 1. Receipt of petty cash fund from home
office
Petty cash-Metu Agency………………………..1,000
Cash…………………………………………………..1,000
b. March 1-31. Fill sales orders from sales agency.
Accounts receivable…………………………….5, 000
Sales-Metu Agency………………………………….5, 000
c. March 1-31. Collections by home office on agency
sales
Cash…………………………………………….3, 000
Accounts receivable…………………………………3,000
d. March 1-31. Pay bills received by home office for
expenses of Metu agency.
Salaries Expense- Metu Agency………………..450
Office Supplies- Metu Agency…………………450
Cash…………………………………………………..900
e. March 31. Replenish sales agency petty cash fund.
Miscellaneous expense- Metu Agency…………550
Cash…………………………………………………550
f. March 31. Record end-of-period adjusting entries:
Cost of Goods Sold- Metu Agency………….3, 500
Office supplies expense- Metu Agency………..150
Merchandise shipments- Metu Agency………………3,500
Office supplies- Metu Agency……………………..........150
March 31. Record end-of-period closing entries:
Sales- Metu Agency………………………….5, 000
Income- Metu Agency…………………………….5, 000
Income- Metu Agency………………………..4,650
Cost of goods sold- Metu Agency……………………3,500
Salaries expense- Metu Agency………………………..450
Office supplies expense- Metu Agency………………..150
Miscellaneous expense- MetuAgency………………...550
Income- Metu Agency…………………………350
Income summary………………………………………350
Accounting for Branch Operations
Normally, however, and especially with larger branches, the home
office and branch maintain separate accounting systems. Under a
decentralized accounting system, an outlying location maintains a
separate general ledger in which to record its transactions.
In such a decentralized accounting system, each maintains a full set
of books with a complete self-balancing set of accounts and
records its transactions with external parties in its own accounting
system.
These transactions are recorded in the normal manner, and no
special treatment is needed.
In addition, the home office and branch both must record
transactions with one another in their respective accounting systems.
Even though the home office and each branch maintain separate
books, all accounts are combined for external reporting in such a way
that the external financial statements represent the company as a
single economic enterprise
 OBJECTIVES OF BRANCH ACCOUNTS

A business firm establishes branches for marketing

the products or services. The parent firm (head
office) is always interested to know the trading results
of its branches. For this purpose, branch accounts are
kept.
 The main purposes of branch accounts
are as follows:
1. Branch accounts helps to know the profit or loss of
each branch.
2. It enables the head office to know the financial
position of each branch.
3. It shows the requirements of goods or cash for
each branch.
4. Branch account is the basis and helps the head
office to control the activities of branch.
5. Suggestions and improvements are based on the
branch accounts.
 ACCOUNTING SYSTEMS

The home office must decide how to

account for the activities and
transactions of the branches.
Accounting systems can be categorized
as either centralized or decentralized.
 Centralized Accounting
Under a centralized accounting system, a branch does not maintain a
separate general ledger in which to record the transaction.
Instead, it sends source documents on sales, purchases, and payroll
to the home office.
Branches usually deposit cash receipts in local bank accounts, which
the home office draws upon.
When the home office receives source documents, it reconciles sales
information with bank deposits, reviews and processes invoices for
payment, and prepares payroll checks and related payroll related
records.
 
Centralized accounting systems are usually practical when the
operations of the branches do not involve complex manufacturing
operations or extensive retailing or service activities.
 Decentralized Accounting
Under a decentralized accounting system, a branch
maintains a separate general ledger in which to record
its transactions. Thus, the branch is a separate
accounting entity, even though it is not a separate
legal entity. It prepares its own journal entries and
financial statements, submitting the latter to the head
office, usually on a monthly basis.
 
Decentralized accounting systems are common for
branches that have complex manufacturing operations
or extensive retailing operations involving significant
credit sales.
 BRANCH GENERAL LEDGER
ACCOUNTING
Intra Company Accounts
A branch is established when a home office transfers cash, inventory, or other
assets to an outlying location. Because the home office views the assets
transferred to the branch as an investment, it makes the following entry:
 
Investment in branch - - - - - - - - - - - - - - - xx
Asset (s) - - - - - - - - - - - - - - - - - - - - xx
 
On receipt of the assets from the home office, the branch makes the
following entry:
Asset(s) - - - - - - - - - - - - - - - - - - - - - - xx
Home office equity - - - - - - - - - - - - - - xx
The balance in the Investment in Branch account on
the books of the home office always equals the
balance in the Home Office Equity account on the
books of the branch. In practice, these accounts are
referred to as the Intra Company or reciprocal
accounts.
At the end of each accounting period, the branch
closes its income or loss to its home office equity
account. Upon the receipt of the branch’s financial
statements, the home office adjusts its Investment in
Branch account to reflect the branch’s income or loss
and makes the offsetting credit or debit to an income
statement account called branch income or branch
loss.
As a result of this entry and upon closing the branch
income or branch loss account to retained earnings,
the branch’s income or loss is included in the home
office’s retained earnings account.
 True Branch Profit:
Revenue……………………………………… xx
Cost of Goods Sold…………………………..xx
Inventory, beg. ……………………………...xx @Home office cost
Shipments from Home Office……………………… xx @Home office cost
Purchases……………………………………………. xx @cost
Inventory, end from shipments………………………. (xx) @Home office cost
Inventory, end from purchases ………………………(xx) @cost
Gross Profit…………………………………………………. xx
Expenses…………………………………………………….. (xx)
True Branch Profit……………………………………………………………………… xx
 Home Office Allocations

The home office usually arranges and pays for certain

expenses that benefit the branches.
The most common example is insurance. In theory, some
portion of the insurance expense should be allocated to
the various branches, so that the home office may
determine the true operating income or loss of each
branch. In practice, however, allocation of home office
expenses varies widely.
Numerous home offices allocate only those expenses that
relate directly to the branch operations, such as insurance.
Some home offices without any revenue producing
operations of their own allocate all of their expenses to the
branches.
 Inventory Transfer Accounts

When inventory is transferred from the home office

to a branch, all that has really happened is that the
inventory has physically moved from one location in
the company to another.
A sale has not occurred, because sales takes place
only between the company and outside customers.
To measure the profitability of a branch, however, an
intra company billing must be prepared. The branch
uses special purchase account called Shipment From
Home office to record these inventory transfers and
makes the following entry
Shipments from home office - - - - - - xx
Home office equity - - - - - - - xx
The home office uses a special contra purchases
account called Shipments to Branch to record
inventory transfers. If the inventory is transferred
and billed at the home office’s cost, the home office
makes the following entry:
Investment in branch - - - - - - - - - - - - - xx
Shipments to branch - - - - - - - - - - - - - - xx
The branch’s ending inventory, cost of goods sold,
gross margin, and operating profit or loss depend on
the amounts of these intra company billings.
 Fixed Asset Accounts
Some home offices require their branches-fixed assets to be recorded
on the books of the home office instead of the books of the branches.
Such a procedure automatically ensures that uniform depreciation
methods and asset lives are used for all branches. The home office
usually charges the branch for the depreciation expense of its fixed
assets.
It does this by crediting accumulated depreciation and debiting the
Investment in branch account instead of debiting depreciation
expense.
The branch debits depreciation expense and credits the Home office
Equity account instead of crediting accumulated depreciation.
When fixed assets are recorded on the home offices books, the fixed
assets pertaining to the branch must be added to the Investment in
Branch account to evaluate the profitability of branch operations in
relation to the total assets actually invested in the branch.
 Other general ledger Accounts
The branch maintains the balance sheet and income
statement accounts necessary to record transactions
that take place between
(1) the home office and the branch, and
(2) the branch and its customers, creditors, and
employees.
 BRANCH ACCOUNTING ILLUSTRATED

Assume that TANA Company, which prepares financial

reports at the end of the calendar year, established a branch
in Modjo on July 1, 1998. The following transactions
occurred during the formation of the branch and its first six
months of operations, ending December 31, 1998.
1. The home office sent $ 28,000 cash to the branch to
begin operations.
2. The home office shipped inventory to the branch. Intra
company billings totaled $60,000, which is the home
office cost. (Both the home office and the branch use a
periodic inventory system.)
3. The branch acquired merchandise display equipment, which cost $
12,000 on July 1, 1998. (Assume that branch fixed assets are not
carried on the home office books.).
4. The branch purchased inventory costing $ 43,000 from outside
vendors on account.
5. 5.The branch had credit sales of $ 85,000 and cash sales of $ 35,000.
6. The branch collected $ 44,000 on accounts receivable.
7. The branch paid outside vendors $ 28,000.
8. The branch incurred selling expenses of $ 15,000 and general and
administrative expenses of $ 12,000. These expenses were paid in
cash when they were incurred and include the expense of leasing the
branch’s facilities.
9. The home office charged the branch $ 2,000 for its share of
insurance.
10.Depreciation expense on the merchandise display equipment
acquired by the branch is $ 1,000 for the six month period.
(Depreciation expense is classified as a selling expense.).
12.The branch’s physical inventory on December 31, 1998, is $
33,000, of which $ 25,000 was acquired from the home
(there was no beginning inventory). The home office’s
physical inventory on December 31, 1998, is $ 150,000 (the
beginning inventory was $ 135,000). (Home office purchases
were $ 285,000.). Cost of goods sold is determined and
recorded in a separate account for each accounting entity.
(Note that the year-end inventory accounts are adjusted in
this entry to the year-end physical inventory balances).
13.The branch closes its income statement accounts.
14.The home office prepares its adjusting entry to reflect the
increase in the branch’s net assets resulting from the
branch’s operations. The following journal entries are
recorded by TANA Company’s home office and its Modjo
branch for the transactions 1 through 14.
Exhibit 1-1
Home office books Branch books
1. Investment in branch $ 28,000 1. Cash $ 28,000
Cash 28,000 Home office equity 28,000

2. Investment in branch - - - 60,000 2. Shipments from home office 60,000

Shipments to branch 60,000
Home office equity 60,000

3. No entry 3. Equipment 12,000

Cash 12,000
4. No entry. 4. Purchases 43,000
Accounts payable 43,000

5. No entry. 5. Cash 35,000

Accounts receivable 85,000
Sales 120,000
6.No entry. 6. Cash 44,000
Account receivable 44,000
 
 

7. No entry. 7. Accounts payable 28,000

Cash 28,000
 

8. No entry. 8. selling expenses 15,000

Administrative expense 12,000
Cash 27,000
2. Investment in Branch 2,000
Administrative expenses 2,000 9. Administrative expenses 2,000
Home office equity 2,000

3. No entry. 10. Selling expenses 1,000

Accumulated depreciation 1,000

4. Cash 10,000 11. Home office Equity 10,000

Investment in Branch 10,000 Cash 10,000
 
Home office
Inventory (EI) 150,000
Cost of goods sold 210,000
Shipments to Branch 60,000
Purchases 285,000
Inventory (BI) 135,000
2. No entry. 13. Sales 120,000
Cost of goods sold 70,000
Selling expenses 16,000
Administrative expenses 14,000
Home office equity 20,000

3. Investment in Branch 20,000 14. No entry.

Branch income 20,000
 Combined financial statements:
inventory transfers at home office cost
Producing Financial Statements for the Branch
Before the branch prepares its closing entries and
submits financial statements to the home office, it
must verify that its home office equity account and
shipments from home office account agree with the
corresponding reciprocal accounts maintained by the
home office. If the accounts do not agree, there are
two possible explanations
• 

1. A transaction by one of the accounting entities has been

improperly recorded by the other accounting entity. The
accounting entity that made the error must make the appropriate
adjusting entry.
2. A transaction initiated by one of the accounting entities has been
recorded by the initiating entity but not yet by the receiving entity
for example, cash transfers in transit, inventory shipments in
transit, and intra company charges. Normally, the receiving
accounting entity prepares the adjusting entry as though it has
completed the transaction before the end of the accounting
period.
 Modjo branch of TANA Company
Financial statements
Income statement
Year ending December 31, 1998
Sales $ 120,000
Cost of goods sold (70,000)
Selling expenses (16,000)
Administrative expenses (14,000)
Net income of branch 20,000
 Home office account
Year ending December 31, 1998

 
Account balance, January 1, 1998 $-0–
Transfers from home office:
Cash 28,000
Inventory 60,000
Expense allocations:
Administrative 2,000 90,000
Transfers to Home office:
Cash (10,000)
Net income (above) 20,000
Account balance, December 31, 1998 100,000
 Balance sheet
December 31, 1998

Cash $30,000
Accounts receivable, net 41,000
Inventory:
Acquired from vendors 8,000
Acquired from home office 25,000
Buildings and equipment, net 11,000
Total assets 115,000
Accounts payable and accruals 15,000
Home office equity (above) 100,000
Total liabilities and equity 115,000
 Producing Financial Statements for the Entire Company

Once financial statements for the Modjo branch have

been developed, TANA Company can create a single
combined set of statements for its entire organization.
Generally accepted accounting principles require that
in reporting the results of operations to its
shareholders, the home combine the detail of the
branch’s income or loss with the home office’s own
accounts making up the net income or loss from home
office’s own operations.
This is accomplished by substituting the branch’s
income statement for the branch income or loss
account in the home office general ledger.
Likewise, generally accepted accounting principles
require that in reporting the balance sheet amounts to
its shareholders, the home office combine the
individual assets and liabilities of both accounting
entities and report the combined amounts. This is
accomplished by substituting the individual assets and
liabilities of the branch for the Investment in Branch
account.
Working Paper for Combined Financial Statements
A working paper for combined financial statements
has three purposes:
 To combine ledger account balances for like
revenue, expenses, assets, and liabilities,
 To eliminate any intera company profits or losses,
and
 To eliminate the reciprocal accounts
 TANA Company
Work Sheet to Combine Home Office and Modjo Branch
Year Ended December 31, 1998

Elimination

Home Combin
Income Statement Branch Dr. Cr.
Office ed
Sales $380,000 $120,000     $500,000
Cost of goods sold (210,000 (70,000)     (280,000)
)

Selling expenses (52,000) (16,000)     (68,000)

Administrative expenses (59,000) (14,000)     (73,000)
Interest expense (19,000)       (19,000)
Branch Income 20,000   20,000   -0-
Income Before Income Taxes 60,000 20,000 20,000   60,000
Income tax (40%) (24,000)       24,000
Net Income 36,000 20,000 20,000   36,000
Statement of retained earnings          
Retained earnings, Jan. 1, 1998 114,000       114,000
Home office equity (pre closing) 80,000 80,000     -0-
+ Net income 36,000 20,000 20,000   36,000
- Dividends declared (10,000)       (10,000)
Balance, Dec. 31, 1998 140,000 100,000 100,000   140,000
Balance Sheet          
Cash 50,000 30,000     80,000
Accounts receivable, unit 60,000 41,000     101,000
Inventory 150,000 33,000     183,000
Land 22,000       22,000
Buildings and Equipment, net 118,000 11,000     129,000
Investment in Branch 100,000     100,000 -0-
Total assets 500,000 115,000   100,000 515,000
Accounts payables and accruals 60,000 15,000     75,000
Long-term debt 200,000       200,000
Common stock 100,000       100,000
Retained earnings 140,000       140,000
Home Office Equity   100,000 100,000   -0-

  500,000 115,000 100,000   515,000

Combined Financial Statements: Inventory Transfer
above home office cost
Inventory transfer can be priced at historical cost;
however alternative procedures do exist. A company
can elect to record merchandise shipments at the
normal sales price, at its variable cost, at cost plus a
predetermined mark up or at some other established
value.
Any time transfers are made at above cost, the home
office must defer recognition of the mark up until the
branch sells the inventory to its customers. To do
otherwise would result in the recognition of profit
from transferring inventory from one location to
another in the company.
To serve as an example assume that the inventory
transferred to the branch from the home office in Exhibit
1.1 was marked up 20% over the home office’s cost of
$60,000. In Exhibit 1.2, we assumed that the branch had
a $33,000 ending inventory, of which $25,000
represented inventory obtained from home the office. In
this case the branch’s ending inventory acquired from
the home office is $30,000 ($25,000 + $5,000 mark up).
Thus, the branch’s total ending should be adjusted
downward to the amount that it would be if the
inventory were transferred from the home office at cost.
Ending inventory is $38,000 (30,000 + 8,000). Exhibit 1.4
shows the journal entries for the transfer of this
inventory above cost, along with the appropriate year
end closing and adjusting entries. The journal entries are
numbered to correspond Exhibit 1.1, which shows
inventory transfers made at the home office’s cost.
 Exhibit 1.4

Home Office books     Branch Books    

2. Investment in Branch $72,000   2. Shipments from Home Office $72,00  
Shipment to Branch   60,000 Home Office Equity 0 72,000
Unrealized Gain   12,000 Inventory Acquired from Vendors    
12. Inventory 15,000   Inventory acquired from home 8,000  
Shipments to Branch 60,000   office 30,000  
Cost of goods sold 210,000   Cost of goods sold 77,000 72,000
Purchases   285,00 Shipments from home office   43,000
13. No entry   Purchases  
0  
     
13. Sales 120,00 77,000
  Cost of goods sold 0
    Selling expenses
16,000
      14,000
  Administrative expenses
    13,000
14. Investment in Brach 13,000 Home office equity
  14. No. Entry
Branch income
  13,000
Unrealized gain
7,000  

Branch Income 7,000

 
When inventory transfers are made above home office’s
cost, the branch’s cost of goods sold should be adjusted
downward to the amount that it would be if the
inventory were transferred from the home office at
cost.
 
The adjustment of the branch’s cost of goods sold
equals the amount of the unrealized gain that was
earned during the year and recognized by the home
office. For TANA Company branch the adjustment will
be as follows:
Total unrealized gain at the time of inventory transfer to
Branch $12,000
Unrealized gain related to ending inventory of
Branch on Dec. 31, 1998 (30,000 – 30,000/1.2) (5,000)
Realized gain during the year 7,000
Likewise, the branch’s ending inventory should be
adjusted. In this case the adjustment is by the
unrealized gain attributable to the ending inventory
on the balance sheet date. For TANA Company’s
branch the amount equals $5,000
 Branch Inventory:

Branch Inventory from Home Office billed price ….xx

Allowance for Overvaluation……………………………… (xx)
Branch Inventory from Home Office…………………. xx
Branch Inventory from outside purchase…………… xx
Branch Inventory - Cost …………………………………………xx
 Illustration 2.4:

To illustrate the accounting for excess freight costs on inter-

branch transfers of merchandise, assume the following for excess
freight costs on interbank transfers of merchandise, assume the
following data. The Home Office shipped merchandise costing Br
6,000 to Dana Branch and paid freight costs of Br 400.
Subsequently, the Home Office instructed Dana Branch to
transfer this merchandise to Evan Branch. Freight costs of Br 300
were paid by Dana Branch to carry out this order. If the
merchandise had been shipped directly from the Home Office to
Evan Branch, the freight costs would have been Br 500. The
journal entries required in the three sets of accounting records
(assuming that the perpetual inventory system is used) as
follows:
 In the Accounting Records of Home Office:

Investment in Dana Branch 6,400  

Inventories   6,000

Cash   400

To record shipment of merchandise and payment of freight costs

Investment in Evan Branch 6,500  

Excess Freight Cost–Interbranch Transfer Expense 200  

Investment in Dana Branch   6,700

Interbranch freight of Br 300 paid by Dana Branch
caused total freight costs on this merchandise to
exceed direct shipment cost by Br 200 (Br 400 + Br
300 – Br 500 = Br 200).
In the Accounting Records of Dana Branch :

Inventories 6,000  

Freight-In 400  

Home Office   6,400

To record receipt of merchandise from Home Office with
freight costs paid in advance by Home Office.
To record transfer of merchandise to Evan Branch under
instruction of Home Office and payment of freight costs of Br
300.

Home Office 6,700  

Inventories   6,000

Freight In   400

Cash   300
in Accounting Records of Evan Branch:
To record transfer of merchandise to Evan Branch under
instruction of Home Office and Normal freight costs billed by
Home Office.
Inventories 6,000  

Freight In 500  

Home Office   6,500

Recognized excess freight costs on merchandise
transferred from one branch to another as expenses
of the Home Office is an example of the accounting
principle that expense and losses should be given
prompt recognition.
The excess freight costs from such shipments
generally result from inefficient planning of original
shipments and should not be included in inventories.
In recognizing excess freight costs of interbank
transfer as expenses attributable to the Home Office,
the assumption was that the Home Office makes the
decisions directing all shipments.
If branch managers are given authority to order
transfers of merchandise between branches, the
excess freight costs are recognized as expenses
attributable to the branches whose managers
authorized the transfers.
THE END
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